Illicit Financial Flows Will be Easier During the Coronavirus Pandemic

Summary: International criminal organizations are now exploiting the coronavirus crisis. The corrupt and criminal entities that thrive on illicit financial flows, or the transfer of illegally earned money across borders, can seize the moment.

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As the world grapples with an unprecedented pandemic, one dangerous group sees an opportunity. International criminal organizations are now exploiting the coronavirus crisis. They see that the cops and regulators who police them are too busy dealing with the fallout of the health and economic impact, and are ready to exploit the moment while attention is elsewhere. The corrupt and criminal entities that thrive on illicit financial flows, or the transfer of illegally earned money across borders, can seize the moment. So unless banks, governments, and multilateral institutions take action, we will witness even more corruption and criminal activity.

One reason that illicit financial flows can increase is that the coronavirus crisis is an abundant environment for corruption. Government outlays of tremendous amounts of money to procure resources and services, often without enough transparency and oversight, mean plenty of open doors for bribes, kickbacks, and contract malfeasance. In addition, the foreign assistance associated with relieving the worst of the pandemic is ripe for misappropriation. Much of the misallocated funds will be laundered and moved through the international financial system. Meanwhile, numerous transnational criminal organizations will still engage in money laundering and other illicit financial activity to maintain their criminal supply chains.

This occurs while the pandemic spreads, making oversight more difficult. Regulators in Canada, Australia, and the United States, which are money laundering havens, have recognized the challenges that banks and other financial institutions will face in conducting due diligence of customers. Given current quarantine considerations, many regulators will be unable to conduct their oversight activities at usual levels. The Federal Reserve has already announced it will temporarily reduce its bank examination activities, while Canada is now triaging its money laundering reporting.

At the same time, police forces around the world are being forced to cut back on essential work that is not related to the coronavirus crisis. There have even been the suggestions that some investigations into homicides might be curtailed in the United Kingdom if conditions there become bad enough. If even murder investigations can be triaged, then what hope is there of investigation into and enforcement against white collar crimes?

Some governments with significant corruption concerns may use public fear resulting from the coronavirus crisis as an excuse to lift the financial oversight they find inconvenient. In Mexico, for instance, the terms and deadlines for the federal superior auditor are suspended indefinitely, as are those for its main national data protection and transparency agency. In Hungary, the increasingly authoritarian government used the crisis to make a blatant power grab by enacting legislation that will allow Prime Minister Victor Orban to rule by decree with no parliamentary oversight.

The good news is much can be done, even in the midst of a pandemic, to address illicit financial flows. Authorities around the world must continue to encourage banks and other financial institutions to find creative ways to conduct customer due diligence, including developing new protocols for compliance against money laundering so employees can work from home as they are securing company and customer private information.

Ending anonymous corporate ownership is also critical to mitigating illicit financial flows, including frauds and scams related to the coronavirus. The United States is egregious when it comes to enabling shell companies and foundations, which are the standard tools used for money laundering. For this reason, the United States is second in financial secrecy jurisdictions, slightly better than the Cayman Islands but worse even than Switzerland. The recent $2 trillion relief legislation contains no mention of beneficial ownership requirements, but other bills seek to close the worst of these loopholes. They must be passed immediately or we will be hearing many stories over the coming years of fraud, waste, and abuse of these funds.

Finally, developed nations such as the United States, the United Kingdom, and European Union states, as well as multilateral institutions such as the International Monetary Fund, need to make transparency, accountability, and anticorruption priority matters in the disbursement of relief funds to developing countries. The International Monetary Fund has promised as much as $1 trillion to support efforts to fight the pandemic, but even its announcement of this financial facility has failed to mention the need for measures against illicit financial flows as part of this huge disbursement.

Illicit financial flows will unfortunately facilitate the corruption and crime accompanying the coronavirus crisis. It is time to ensure that economic stimulus efforts and money for the pandemic response is insulated from corruption. Trying to collect back funds after they have been laundered is devilishly hard, taking years of investigative work and legal proceedings in order to eventually receive back only pennies on the dollar. Money lost to corruption and crime is money that should have been used for lifesaving measures and to keep countries moving in this crisis. Proactive efforts to stem illicit financial flows during the era of the coronavirus will save lives.

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